Anthem defies Wall Street, rivals, with stellar 1Q results pegged to Obamacare business

The News:

Anthem Inc. (Indianapolis IN), which has 1.1 million customers in individual Obamacare plans, said it was moving ahead with its 2018 insurance filings but had told state regulators it could still increase premiums sharply and exit some markets.

@AnthemInc may increase #Obamacare premiums sharply and exit some markets Click To Tweet

Shares of the US health insurer, which also reported much higher-than-expected quarterly earnings on Wednesday (April 26, 2017), rose sharply.

While insurers expect Obamacare to continue through 2018, the Republican disagreements have put two important funding aspects into question: cost-sharing subsidies for patients’ out-of-pocket costs and an industry-wide health insurance tax.

Anthem, the largest Obamacare insurer alongside Molina HealthCare Inc., is the first to detail how it will handle this, says Reuters.

Anthem CEO Joseph Swedish said on a conference call with analysts that without cost-sharing subsidies, premium rates could rise 20% or more. If the health insurance tax is in place in 2018, rates could increase 3% to 5%, he said.

As a result, Anthem may reduce local area participation, request additional rate increases, eliminate product offerings or exit “certain individual ACA-compliant markets altogether,” Swedish said. Anthem operates BlueCross BlueShield plans in 14 states.

The cost-sharing subsidies are “a major part of the ACA, and it would be a major blow to the insurers if the administration withheld funding,” Morningstar analyst Vishnu Lekraj said.

First-quarter Obamacare individual insurance medical claims were a bit higher than expected, but higher 2017 premiums brought in more revenue, Anthem said. As a result, the ratio of claims paid to premiums received was more favorable in the quarter.

Operating revenue rose about 10% to $22.32 billion, exceeding estimates of $21.27 billion.

Separately, two days after Express Scripts Holding Co. said it had lost its pharmacy benefit management contract for Anthem, CEO Swedish said the company had not made a decision on or ruled out any vendor, according to Reuters. While declining to comment specifically on the Express Scripts situation, which is being litigated in federal court, Swedish said “we’ve not ruled anyone in or out.”

Anthem, which has sued Cigna Corp. to stop the smaller rival from terminating their proposed $54 billion merger after US antitrust regulators rejected it, also said on Wednesday (April 26, 2017) that it expected an appeals court ruling soon.

Anthem shares were trading up a healthy 7% on the week at $179.79 Thursday.

Steve’s Take:

Anthem, which operates under the Blue Cross and Blue Shield brand in 14 states, is bucking the trend among its rivals and remaining a major player offering individual coverage under the ACA. Anthem has 1.1 million individual members who purchased policies on public exchanges and is one of the nation’s largest providers of Obamacare.

But Anthem isn’t ruling out reducing Obamacare service areas, terminating certain products or raising rates in 2018 if Congress and the Trump administration don’t fund cost-sharing reductions (CSR), according to Forbes. Trump has threatened to cut off CSR funding that helps low-income Americans afford individual coverage, and it remains unclear whether or how they will be funded in budgeting that takes center stage this week in Washington.

(UPDATE: Democrats on Thursday (April 27, 20117) said the White House has signaled that the cost-sharing reduction (CSR) subsidy payments from Obamacare will continue even if language guaranteeing them is not included in the government funding bill, according to Reuters and ABC News. The latest move by the White House removes a major obstacle in budget talks between Republicans and Democrats ahead of the funding deadline on Friday, and significantly lowers the odds of a government shutdown.)

At a minimum, this means the administration will continue making the payments until the end of May.

Anthem increased its individual membership by more than 220,000, including “ACA-compliant” membership from companies that withdrew from the market, and its business has benefited from double-digit percentage price increases to Obamacare customers.

The ACA was so brutal for insurers last year that even Anthem still seems unwilling to fully believe that healthier ACA patients–meaning lower costs for insurers–are a trend. According to Bloomberg Intelligence, Anthem has the most ACA exposure of any large diversified insurer.

It is also one of the last of the major insurers still willing to give Obamacare a chance. UnitedHealth Group Inc. and Humana Inc. have mostly pulled out of the exchanges due to large losses, and Aetna Inc.’s CEO said the exchanges were in a “death spiral.”

But there are signs insurers’ assumptions about Obamacare may have been too gloomy.

So far, Swedish said, Anthem’s individual ACA “claims experience has been better than the prior year.” But Swedish cautioned that the company was monitoring its new Obamacare business because just under 50% of this business was new to Anthem. He said he would provide more information about its ACA participation in the second quarter of this year.

Anthem is benefiting from new business throughout its product lines. That helped the company’s total medical membership eclipse 40 million, rising nearly 3% to 40.6 million at the end of the first quarter from 39.6 million last year.

Anthem continues to benefit from Medicaid expansion under the ACA. The insurer added more than 500,000 Medicaid members to 6.5 million compared to 6 million in the year-ago period.

Anthem said it expects medical enrollment to grow by “nearly 300,000 to 500,000 members for the full year 2017.” Swedish said the company’s growth is ahead of earlier expectations.

Given this superlative success of a quarter, Anthem’s current earnings guidance looks very guarded, argues Max Nisen for Bloomberg. Anthem’s forecast suggests earnings for the last three quarters of the year will decline relative to 2016. There are some quirks of the first quarter that could set up a drop-off in subsequent quarters. Anthem retroactively recognized some Medicaid revenue in the quarter.

If Anthem’s ACA business continues to hold up relatively well–not out of the question, given fine-tuning of the program and higher premiums Anthem is charging relative to last year–and if its government business keeps growing, then there’s substantial upside to the company’s forecast, Nisen says.

Anthem wasn’t the only firm to get an unexpected ACA boost in the first quarter. Centene Corp., another insurer with a heavy Medicaid presence and significant ACA commitment, announced earnings Tuesday (April 25, 2017) that also beat analyst expectations, thanks in part to lower-than-expected ACA costs.

There’s still plenty of risk for Anthem. Unknowns start with whether the new Obamacare enrollees may turn out to be sicker than expected or have a high drop-out rate. Plus the continuing political brawl pitting Trumpcare versus Obamacare could wax negative for the insurer. On the other hand, the company’s decision to stick with the ACA for now may pay off big time.

Bottom Line:

Anthem’s position on the ACA marketplaces is under a national microscope since the insurer is a major presence in 14 state exchanges, with nearly 1.6 million people enrolled in its ACA plans; currently, 302 counties in states including Georgia, Missouri and Ohio have only Anthem plans available on their marketplaces.

So what do the analysts think, and what do the numbers tell us?

As of April 21, 2017, the consensus forecast among 24 polled investment analysts covering Anthem advises that the company will outperform the market. This has been the consensus forecast since the sentiment of investment analysts improved way back on May 24, 2014. The previous consensus had advised investors to hold their position.

Recommendations 1yr ago Latest
Buy 9 9
Outperform 7 3
Hold 8 11
Underperform 0 0
Sell 0 0

1 YEAR CHANGE   +21.73%

Share price forecast

The 17 analysts offering 12 month price targets for Anthem have a median target of $179, with a high estimate of $202 and a low estimate of $151. The median estimate represents an exact match with today’s closing price.

Anthem shares have risen 17% over the last three months compared with a 4% rise in the S&P 500.

Dividends

In 2016, Anthem reported a dividend of $2.60, which represents a 4% increase over last year. The analysts covering the company expect a repeat of $2.60 for the upcoming fiscal year.

While there are plenty of imponderables that could drastically alter the operating environment for the insurer space, Anthem’s management is demonstrating a calmer, wiser growth and profit-directed skill set that is redounding to the benefit of its shareholders’ portfolios.

What, then, sets Anthem apart from its rivals? Could it lie in its nonprofit, Blue Cross roots where it learned how to manage the business that the for-profits routinely spurned? Perhaps.

The important point is that Anthem has demonstrated something that its rivals for the most part haven’t, namely, making a profit on Obamacare. And it’s now poised to control the lion’s share of that snubbed business.

Steve's Take: I like the buy consensus for @AnthemInc as they are profiting from #Obamacare Click To Tweet

I like the Buy consensus of over a third of polled analysts, especially in light of these latest financial results, forward guidance and current healthcare political climate. When we see Anthem’s 2nd quarter results we’ll learn whose crystal ball got it right.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.